All Forum Posts by: Bill Walston

Keith, check out this blog post. It's one of the best I've seen on the topic.

It sounds like you're getting your corporations confused. It is the
C-Corporation that pays dividends to shareholders, not the
S-Corporation.

Cash paid to S-corporation shareholders, in general, is called a distribution. And distributions are not taxed at the time they are paid. That's because the S-Corporation is a pass through entity and you pay taxes on the profits of the business at your individual tax rates. The cash is actually a distribuption of "previously taxed income." There are a few exceptions to this general rule, but aren't relevant to this discussion.

Got it...you are absolutely right..there is no advantage. That's why, all things being equal, for rental property, I (and most others) recommend the default status for your LLC. I rarely, if ever, recommend a corporate election for an LLC holding rental properties. With a dozen properties you may want to have either an LLC with a corporate election or a S-Corporation act as the manager (not the owner) of your properties. This will give you a corporate entity to give you some of those benefits you mention. You may want to discuss this with your tax pro who is in a better position to address your specific tax situation.

It would depend on whether you accept the default tax status or elect corporate status for your LLC.

SM-LLC (default): pass through to Form 1040, Schedule E

MM-LLC (default): Partnership Return

SM and MM-LLC (corporate status): Corporate return (Form 1120 or 1120-S)

Byran is spot on. Other things being equal, if your business generates earned income (as with rehabs or wholesaling) you most likely would elect S-Corporate status. On the other hand, if your niche is rental properties (passive income) then you would opt for the partnership election if you are a MM-LLC. I rarely, if ever, recommend the C-Corporation election for owning real estate.

Yeah, you do :) Even though you are forming a SM-LLC you are NOT your business - at least not legally anyway. An LLC is a separate, legal entity formed and governed under and by the laws of your state. The SM-LLC is disregarded only for tax purposes. As such, if you want to transfer the properties to the LLC you will need to deed them over. An alternative you might consider is to transfer the properties to a land trust and then transfer the beneficial interests of the trusts to you SM-LLC. You should consult your real estate attorney and/or tax pro to discuss your options and the best strategy for your specific situation.

Mikel, the beneficiaries control a land trust. They simply instruct the trustee to sell the property, which essentially ends the trust. That being said, in most wholesale deals that I've seen use a land trust, the trust is not dissolved. The beneficial interest of the trust is simply assigned to the buyer.

Agreed Steven. But here in my neck of the woods, the rehab expenses are added to the cost of the project, which is treated as inventory. Rather than treated as current expenses they are deducted when the property is sold as 'cost of goods sold.' The profit from the sale of rehabs is, of course, treated as business (ordinary) income. Is that how you see it?

As Craig said, you definitely need the liability insurance.

I don't, however, recommend owning the property as joint tenants. While the property would avoid probate and pass directly to you, you really will not gain any significant asset protection benefits. In fact, one of the disadvantages of joint tenancy is that judgment creditors of one joint tenant can attach that person's share of the property. A couple of others that come to mind are: 1) one joint tenant can convey his/her share to a third party and thus convert joint tenancy to tenancy in common, and 2) the stepped up basis on inheritance is affected.

Have you considered a land trust? You would accomplish your goal of avoiding probate and avoid most of the disadvantages of joint tenancy.